Despite the critical importance of CEO succession, many boards find themselves unprepared when the inevitable actually comes to pass. As a result, what should be an orderly, well-planned transition often turns into a firefighting exercise more akin to crisis management than farsighted stewardship.
Now is the time to prepare. By assessing your board's preparedness against the following proven principles, you can close the gap between the company's existing succession planning and a best-practice CEO transition.
Review strategic alignment.
The board should be involved in a strategic review of the company's future sources of value creation, revenue expansion, and earnings growth. Such a review enables the board to understand the linkage between the required experience and capabilities of the CEO over the next three to five years and whether the current CEO is fully aligned with those requirements.
Assess board readiness.
Identify the directors who have participated in successful CEO successions. Despite higher CEO turnover in recent years, we often encounter boards where no directors have been through a CEO succession. Determine if there is a director who would be the natural leader of the succession process.
Assess internal candidates.
The board should have in-depth knowledge of internal candidates—how each would lead the company, increase revenues, develop new sources of earnings growth, and take on new competitive threats. Complement such knowledge with regular contact with each candidate.
Know the next generation.
Learn about the high-potential leaders below the CEO's direct reports and make sure that specific, well-defined development plans are in place for them. One of our clients recently evaluated more than 30 executives at that level in order to identify future leaders and accelerate their career progress.
Examine CEO incentives.
Provide incentives to the current CEO to develop multiple successors over a defined timeline and consider making it part of the annual compensation plan. Of the principles discussed here, this is the most rarely practiced, yet potentially one of the most effective.
Benchmark external candidates.
When was the last time the board benchmarked the external CEO talent pool against the internal candidates? Develop an understanding of the outside talent pool versus internal talent.
Mitigate transition risks.
Assess the risks inherent in any CEO transition and make sure a plan exists to mitigate each of those risks during the new CEO's first year in office. Building an unassailable succession process is the shared responsibility of the board and the CEO. With the right information and collaboration there should be no surprises—and no firefighting—when the baton is passed to the new leader.